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Citigroup to Pay $590 Million in Subprime Lawsuit Settlement

In one of the largest settlements of suits tied to the financial crisis, Citigroup Inc. agreed to pay $590 million over claims that it deceived investors by hiding the extent of its dealings in toxic subprime debt.

The pact, with investors who purchased Citigroup stock in parts of 2007 and 2008, represents the latest effort by Citigroup Chief Executive Vikram Pandit to put the pain from the financial crisis behind it.

Citigroup accepted $45 billion in U.S. aid in 2008 and 2009 that it has since repaid. But shares of the New York company remain more than 90% below their level when Mr. Pandit took the reins in late 2007 after the resignation of Charles Prince amid mortgage-securities losses.

Citigroup denied the allegation, saying it is settling "solely to eliminate the uncertainties, burden and expense of further protracted litigation." It said existing legal reserves will cover the cost of the settlement.

Citigroup was one of several financial institutions—including American International Group Inc. —sued by shareholders who saw their investments plunge in value in the financial crisis. Citigroup's market value has dropped by $173 billion since early 2007.

The Citigroup case was particularly high profile, because of the size of the company's bailout, the seriousness of the accusations and the prominence of the company's board.

The complaint filed in federal court in Manhattan alleged that an underwriting spree at the height of the housing boom left Citigroup in 2007 with far more unmarketable securities known as collateralized debt obligations, or CDOs, on its balance sheet than it had disclosed to investors.During the class period, the complaint estimates, Citigroup underwrote in excess of $70 billion of such securities. While investors assumed Citigroup had sold most of those securities, the complaint alleged that the bank had retained some $57 billion on its books.

In November 2007, as the financial markets began to seize up, Citigroup disclosed it would have to take an $8 billion to $11 billion write-down on $46 billion of CDOs, the complaint alleges. Barely two months later, the size of the write-down had ballooned to $18 billion and Citigroup disclosed it owned a further $11 billion of CDOs. Write-downs ultimately totaled $31 billion, according to the complaint.

The settlement covers investors who bought Citigroup common stock between Feb. 26, 2007, and April 18, 2008—the beginning of a ruinous stretch for shareholders in the global banking company.

Citigroup shares began that period at $527 each, adjusted for a 1-for-10 reverse stock split in May 2011, and ended it at $251, wiping out $110 billion of market value over the period. The company had roughly 5 billion shares outstanding during the class period. Based on the judge's order, it appears that the expected recovery is 19 cents a share, including 3 cents of attorneys fees and expenses.

The bank's stock has since tumbled further, due in part to shares issued to repay U.S. aid during the crisis. Citigroup shares rose 57 cents Wednesday to $29.91 in New York Stock Exchange composite trading.

The allegations are similar to those brought by the Securities and Exchange Commission, which in 2010 charged Citigroup with misleading investors about the company's exposure to subprime mortgage-related assets.

Citigroup paid a $75 million penalty, and a former chief financial officer and former head of investor relations paid $100,000 and $80,000 respectively over their roles in Citigroup understating its exposure to subprime mortgages by more than $37 billion.

Wednesday's agreement is the largest legal settlement tied to financial-crisis dealings in CDOs, and the third-largest settlement of a class-action lawsuit tied to the financial crisis, according to Jeff Nielsen, a managing director of Navigant Consulting, a Washington-based banking-related consulting firm.

Wachovia Corp., now part of Wells Fargo & Co., agreed last year to pay $627 million to put an end to allegations that it misled investors about the quality of its mortgage loan portfolio. Countrywide Financial, now part of Bank of America Corp., agreed in 2010 to pay $624 million over accusations that it misled investors about risky mortgage practices. Both companies denied wrongdoing.

AIG has been sued by various shareholders who alleged the insurer made false and misleading statements about its financial health and exposure to subprime mortgages and CDOs before its near-collapse and government bailout in 2008. In the recent second quarter, AIG recorded a $719 million increase in its estimated legal liabilities, mainly for the shareholder lawsuits, which are still pending.

The Citigroup settlement requires approval by the U.S. District Court for the Southern District of New York. A hearing is scheduled for Jan. 15.